India's 'Bond' with the World

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Aerial panoramic view of Mumbai's Lower Parel skyline, with Worli, Prabhadevi, Elphinstone, Dadar and Bandra Aerial panoramic view of Mumbai's Lower Parel skyline, with Worli, Prabhadevi, Elphinstone, Dadar and Bandra

Behind the vibrant streets of Mumbai, in the boardrooms of India’s financial capital, a subtle yet significant transformation is unfolding.

Late in 2023, JP Morgan announced India’s inclusion in its Global EM Bond Index, a decision that could redefine the country's financial landscape.

Soon after, in March 2024, Bloomberg made its own announcement of India’s inclusion into its EM Local Currency Government indices.

These inclusions are to happen in a phased manner. Starting in June 2024, Indian government bonds will gradually climb the index ladder, reaching a 10 percent share of the JP Morgan index by March 2025.  For the Bloomberg index, a similar process will start in January 2025 and go on until October 2025.

What does this mean for India?

If India is to realize its dream of becoming a developed economy by 2047, the centenary of independence, it will need to attract private capital to stay competitive and provide a high standard of living to its people. Until now, however, the availability of private capital - at the right price - has been one of India’s major challenges. So far, India has mainly relied on domestic funding by the public sector to finance large initiatives, making borrowing more expensive, particularly for ambitious infrastructure projects - even more so for eco-friendly efforts to combat climate change.

Now that more of government bonds can be bought by foreign investors, a larger share of domestic financial resources will be available for investment in avenues beyond Government Securities (G-Secs). Over the next five years, experts predict an annual wave of foreign investment of $30-40 billion, freeing up an equivalent amount of domestic capital for investment by the private sector. 

Reactions to the move have been positive. "India joining the JP Morgan EM Bond Index is more than a milestone - it's a green light for global investors to take a keen interest in India,” said Lakshmi Iyer, CEO, Investment & Strategy, Kotak Alternate Asset Managers Ltd., who works at the frontline of this transformation.  

"This not only vouches for India’s macro stability but also diversifies the investor base, injecting dynamism into India’s capital market,” added Suyash Choudhary, head of Fixed Income at Bandhan Mutual Fund.

It may not change everything overnight, but it opens a door for a sustained flow of money into India. Moving ahead, it is expected that India will enter other major indices, such as the FTSE, which is six times larger.

So why is this a big deal?

Primarily, global bond indices help investors – including mutual funds, pension funds, and passive investors – to track bond movements in multiple jurisdictions, enabling them to make comparisons that guide their investments. India’s inclusion in global indices can thus bring several benefits.

One, it means that there is a broad consensus amongst foreign investors that the country has reached sufficient financial stability and that there is an appetite to include Indian Government Securities (G-Secs) in global investments portfolios.

Two, it typically lowers borrowing costs for the government, and ultimately for Indian firms. Because when demand for a country's bonds go up and supply remains limited, yields reduce.

Three, with a larger share of G-Secs being held by foreign investors, domestic institutional investors will look for other avenues to invest their capital, with the extra pool of money available in the market being used to address long-term financing gaps such as in infrastructure and climate finance, where the needs are daunting.

Navigating the financial landscape

However, to fully benefit from these changing dynamics, India will need to address other challenges simultaneously, such as improving project preparation, creating a pipeline of bankable projects, upgrading implementation capacity and more.

As with any good news, a reality check is also essential. Joining the big league can make India's debt market more vulnerable to global headwinds, akin to riding a roller coaster. To keep this economic roller coaster on track, Indian monetary and financial sector authorities will need to stay prudent and maintain sound macroeconomic and financial sector indicators.

Over the years, the World Bank has supported a variety of India’s initiatives, such as promoting blended finance instruments to mobilize private capital, helping improve the country’s capacity to assess climate risks, support new approaches for financing municipalities and agriculture, in addition to helping MSMEs to decarbonize. 

We will continue to support the government and other key stakeholders in sculpting a financial landscape that both fortifies India’s resilience against market fluctuations and helps deepen its financial intermediation capacity.


Laurent Gonnet

Lead Financial Sector Specialist, Finance, Competitiveness and Innovation Global Practice

Tushar Arora

Senior Financial Sector Specialist, World Bank

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